No Evidence of Remission or Cessation of Liability: ITAT deletes Addition of Liability as Profits chargeable to Tax u/s 41(1) [Read Order]

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has held that no evidence of remission or cessation of liability and deleted the addition of liability as profits chargeable to tax under section 41(1).

The assessee, M/s Schoeller Technologies India Pvt. Limited. is engaged in the business of processing textiles for the use of defense personnel. During scrutiny assessment proceedings the Assessing Officer added a sum of Rs. ₹3,12,73,991/-payable to the promoter towards commission, knowhow fees, and royalty which are outstanding constantly for 2012-13 onwards, to the total income of the assessee under Section 41(1) of the Act.

The assessee preferred an appeal before the CIT(A). The CIT(A) held that the Assessing Officer failed to satisfy the basic requirement under Section 41(1) of the Act and deleted the addition. The Aggrieved revenue filed an appeal before the ITAT.

The counsel for the assessee submitted that the assessee was making consistent losses for the last several years and therefore, the promoter company was supporting the assessee in continuing its survival. The sums payable to the promoter towards commission, knowhow fees, and royalty are outstanding constantly from 2012-13 onwards. The accumulated losses of the company is ₹2.57 crores and therefore, the sum payable to the holding company remained unpaid.

The Tribunal observed that non-payment of outstanding liability where the liability still exists, cannot be added under Section 41(1) of the Act. The Tribunal further observed that the assessee is showing liability in his books of account and therefore, the same exists.

The Coram of Mr. Prashant Maharishi, AM,and Ms. Kavitha Rajagopal, JM has held that “unless, there is evidence of remission or cessation of liability, provisions of Section 41(1) of the Act do not apply. In fact, in this case,the assessee has acknowledged the existence of liability in its balance sheet year to year, and shown a relationship with the creditor and reasons for non-payment. In view of this, we do not find any infirmity in the order of the learned CIT (A) in deleting the above addition”.

Mr. Bharat Gandhi and Ms. PunamKotkar appeared on behalf of the assessee and Mr. Hoshang B. Irani appeared on behalf of the revenue.

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